Markets in Motion: Hawkish Fed Spurs USD Surge.
- USD Strengthens on Hawkish Fed: The Fed’s 25bp rate cut came with unexpectedly hawkish messaging, with limited easing projected for 2025. Powell emphasized a cautious approach, reducing urgency for further cuts as labor market concerns ease.
- Dollar Rally Continues: Bear flattening in the US yield curve drove DXY to 108.0. Markets expect a January hold, with the dollar’s rate advantage likely to sustain its strength into 2024.
- Diverging Policies Impact USD/JPY: The Fed’s hawkish tone and a cautious BoJ propelled USD/JPY past 155, with a trajectory toward 158-160, where Japan may intervene to stabilize the yen.
- EUR Under Pressure, Scandinavia in Focus: EUR/USD is sliding toward 1.02-1.03 amid USD dominance. Riksbank may cut rates by 25bp, while Norges Bank is expected to hold, with EUR/SEK and EUR/NOK stability likely near term.
- BoE Holds Steady on Rates: The Bank of England is poised for a quiet hold, signaling cautious easing ahead but noting sticky inflation. GBP is expected to remain stable, with EUR/GBP capped below 0.8300.
USD: Fed’s Hawkish Tone Drives Dollar Rally
The Federal Reserve delivered a 25bp rate cut yesterday as anticipated, but the overall messaging was unexpectedly hawkish. Revised dot plot projections now suggest just 50bp of additional easing in 2025, with one FOMC member voting to hold rates. Fed Chair Jerome Powell emphasized a cautious approach going forward, stating that more progress on inflation is needed for future cuts. Earlier concerns about the jobs market, which had driven a dovish shift, have diminished according to Powell, reducing urgency for further easing.
The US yield curve’s bear flattening pushed the dollar index (DXY) to 108.0. As discussed in our FOMC review, this hawkish recalibration is likely to sustain USD strength into 2024. Markets anticipate a rate hold in January, with 11bp priced for March. With the dot plot setting a high bar for surprises, the dollar’s rate advantage remains robust.
Meanwhile, the Bank of Japan delivered a cautious hold, interpreted as dovish by markets. Governor Kazuo Ueda stressed a data-dependent approach, signaling the need for more information on wages and growth before considering hikes.
USD/JPY surged past 155 on diverging policies, eyeing 158-160, a zone where the BoJ previously intervened to stabilize the yen. Japan’s intervention is expected to find alignment with US Treasury policies, as seen in past currency stabilization efforts.
EUR: Eyes on Scandinavian Central Banks
EUR/USD slipped further after the Fed’s hawkish stance, with Powell’s remarks supporting prolonged USD dominance and a wider Atlantic spread. This reinforces our expectation of EUR/USD testing the 1.02-1.03 range in the coming weeks.
In Scandinavia, the Riksbank and Norges Bank are in focus. A 25bp cut is anticipated from the Riksbank, reflecting dovish communication and mixed economic signals, including soft October growth but hotter-than-expected inflation. Rates are likely nearing a floor at 2%. EUR/SEK is expected to stay steady around 11.50.
Norges Bank, meanwhile, is expected to hold rates as core inflation rose to 3.0% in November, supporting the NOK. While a 1Q25 rate cut remains possible, current fundamentals suggest stability near 11.80 for EUR/NOK, with limited upside for the krone in the near term.
GBP: Bank of England Opts for Quiet Hold
All signs point to the Bank of England maintaining rates today, with a likely 8-1 vote split. Without a press conference, the announcement is expected to be uneventful. The BoE is expected to signal cautious easing ahead while acknowledging persistent inflation in services and wages.
For now, the pound is unlikely to react significantly. The near-term outlook remains supportive for GBP, with EUR/GBP capped below 0.8300 unless fresh UK data prompts a reassessment of hawkish expectations.